Lael Brainard, the vice chairman of the Federal Reserve, has talked about the importance of developing strong regulations for the crypto space. She stated that it is essential to come up with these regulations before the industry becomes so massive and interconnected that it threatens the stability of the entire financial system.
On Friday, the Board of the Federal Reserve Governor’s vice chairman, Lael Brainard attended a conference in London organized by the Bank of England (BoE) where she talked about decentralized finance (DeFi) and crypto regulation.
She referred to the volatility in the crypto space and asserted that it had highlighted the vulnerabilities that exist in the crypto financial system. She went on to say that it was evident that crypto, as well as traditional financial systems, are susceptible to maturity, opacity, liquidity transformation, settlement, and leverage risks.
Brainard also noted that innovation is undoubtedly capable of making financial services more inclusive, cheaper, and faster and this can be accomplished in ways that are inherent in the digital ecosystem. However, she added that it was necessary to come up with sound regulation of the crypto ecosystem before it becomes so widespread and is integrated so deeply within the broader financial system that it starts threatening its stability.
The vice chair of the Federal Reserve Board also asserted that both national, as well as international cooperation, is required to accomplish this goal. She said that the recent turmoil in the market and the losses that people had suffered indicate that there is a greater need for establishing crypto regulations and ensuring compliance.
She also said that not only should existing regulations be used, but should also be adjusted for dealing with areas of the crypto ecosystem, such as the decentralized finance platforms and protocols. Brainard said that they could enhance financial resilience in the future if they add the crypto financial system to the regulatory framework and apply the same principles of risks, disclosure, and outcomes.
Use of CBDC
The vice chairman also stated that a central bank digital currency (CBDC) in the US could assist with financial stability because it would provide a neutral and reliable settlement layer in the crypto ecosystem.
US President Joe Biden issued an executive order back in March this year for developing a regulatory framework to govern crypto assets and their international engagement. The US Treasury department delivered this framework to him last week on Thursday. The Treasury also said that global crypto standards can only be developed by collaborating with international allies in order to regulate the digital asset market properly.
It is not surprising that there is a lot of talk about crypto regulation, as the recent turmoil in the market has shaken things up significantly. The collapse of the UST stablecoin and Luna cryptocurrency has resulted in liquidity issues that have reverberated throughout the market, driving several companies into liquidation and creating financial problems for others. This has prompted regulatory authorities to speed up their work in terms of crypto regulation.